The Japanese yen strengthened significantly, climbing over 1% against the U.S. dollar on Thursday, and at one point touching 156.15 per dollar. This marks its strongest level against the dollar since August 3, shortly after a coordinated intervention by the U.S. and Japan to bolster the currency on July 31. This surge revived discussions about potential further currency intervention, following Japan's record expenditure of $98 billion (15.4 trillion yen) between July 30 and August 26 to support the yen. The U.S. also participated in a yen-buying effort in late July, though the exact amount was not disclosed, with a note from U.S. Treasury Secretary Scott Bessent suggesting $5-$10 billion.
However, market watchers, including Japan Macro Advisors' chief economist Takuji Okubo and ING's global head of markets Chris Turner, suggested that the recent moves were more likely tied to increased bets on a Bank of Japan (BOJ) rate hike this month, rather than a "stealth intervention." Hawkish comments from BOJ policymakers, particularly board member Hajime Takata's remarks on Wednesday about the central bank hiking rates "nimbly" in response to rising inflation and Governor Kazuo Ueda's openness to higher rates, have fueled these expectations. The BOJ's next monetary policy decision is scheduled for September 18, with markets now pricing in a near-certain 25 basis point rate hike and even considering the possibility of a follow-up move.
The yen's rebound also reflects a shift in market psychology, with investors becoming less inclined to aggressively short the currency due to the prospect of a BOJ rate hike. This is a significant change given that the yen had hit a four-decade low against the dollar just six weeks prior. Data from Citigroup indicates a flip from bearish to bullish positioning on the yen since early August, with leveraged funds, banks, and real-money investors net-buying the currency. This reversal of short bets could have a dramatic effect, with JPMorgan analysts estimating that a full unwinding of accumulated yen shorts could see the USD/JPY fall to the 142-146 range.
Adding to the yen's strength are other factors such as potential capital repatriation by Japanese institutional investors, who are the largest overseas holders of U.S. Treasurys with around $1.1 trillion. There are signs that a rise in Japanese government bond yields is compelling these investors to repatriate funds, and official data shows they are shedding foreign bonds at the fastest pace in four years. U.S. political pressure, with Treasury Secretary Scott Bessent urging the BOJ to communicate its interest rate path, and dovish comments from Federal Reserve Governor Christopher Waller trimming U.S. rate hike bets, further contribute to the yen's upward momentum by narrowing the rate gap between the U.S. and Japan.
